Real Estate a Popular Choice for Self Directed IRAs

An Independent Registered Investment Advisory firm, NUA specializes in non-traditional investments within a Self Directed Retirement Account (SDRA)

PORTLAND, Maine (August 18, 2010) - With the continued volatility of the stock market, many investors are putting their retirement savings into SDRAs – Self Directed Retirement Accounts – and often the asset chosen in those accounts is real estate.

SDRAs allow investors to pursue investments they know or understand. If they know real estate, they can use that knowledge to invest in property, notes or pre-construction developments within a tax- deferred qualified retirement account, whether it’s a Traditional/Roth IRA, SEP IRA,401(k), or Health Savings Account.

Since the creation of the IRA in 1974, Americans have been able to utilize their tax-deferred retirement assets for the purchase of a wide range of non-traditional assets. But somewhere along the way, one of the most important concepts of owning an IRA – the concept of self-directing your assets – was forgotten.

Non-traditional investment opportunities are virtually endless – from web domains to mortgage notes to buying and selling show horses – with a few exceptions per the Internal Revenue Code (IRC). But real estate is the popular choice for self directed investors wanting to diversify their portfolio. And why wouldn’t it be? Most investors own a home and understand how real estate performs. They understand that the value of real estate typically will not decline to zero due to the inherent value of the land.

Advantages of Real Estate within a SDRA:

Self Negotiation – Savvy investors, are capable of self-negotiating value while acquiring real estate for less than it is actually worth. Compare that to the stock market where transactions are coordinated through the stock market so you will pay the market price if you want a particular stock.

Control – The ability to make decisions on how your asset will be managed to generate income and equity. There are multiple things you can do to increase the value of the real estate, but be careful of any disqualified persons making any improvements, which could cause a prohibited transaction.

Leverage – An SDRA can use leverage for a real estate purchase. Example: an investor has $200,000 in a SDRA and wishes to purchase property worth $300,000. SDRA would borrow the remaining $100,000 (note-mortgage payments must come from a qualified account and UBIT may apply on the leveraged portion). This is a significant opportunity, especially when considering cash on cash return. Compare that with the stock market offerings. An account with $200,000 that purchases $200,000 worth of stocks and bonds on day of purchase is worth just $200,000. Leveraging within a SDRA is a powerful tool, but needs to be used wisely.

Sense of Ease – Many people own a home and understand how real estate works and investors like the fact they can physically see and touch their investment. For many, real estate provides a sense of control and freedom, knowing they can have a direct impact on their investment.

A word of caution though, non-traditional investing through SDRAs is generally not a do-it-yourself proposition, requiring additional knowledge of the rules, regulations and guidelines set forth within the IRC. The best chance of succeeding with non-traditional investing is to work with professional advisory firms that specialize in this area and can take the extra steps needed to make sure investments through the SDRA are in compliance with the guidelines.

An independent wealth management advisor specializing in non-traditional investing will make sure the real estate investment idea is a good portfolio allocation fit and also develop an exit strategy for the investor. The professional advisor helps manage risk, rules and regulations, and provides an overall investment strategy, ensuring diversification.

The advisor also can help those interested in self directed investing who may not have a firm idea or interest, by providing a range of non-traditional options that protect clients by meeting high standards and complying with all guidelines and regulations.

Holding real estate in a portfolio may ease feelings investors get when the stock market is volatile. It may be comforting to have something tangible and physical as an investment and not just a piece of paper indicating your holdings.
About the Author: Laurie Bachelder is a principal and chief compliance officer of NUA Advisors, LLC, an independent Registered Investment Advisory firm bridging the gap between traditional and non-traditional investing with offices in Portland, Maine, Lexington, Mass., and Columbus, Ohio. For more information, contact NUA Advisors, LLC at http://www.nuaadvisors.com or Ms. Bachelder directly at laurie@nuaadvisors.com.

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Disclosures: The examples used in this article have resemblance to actual investments, but specifics have been withheld to maintain the privacy of the client and their investment portfolio. This article is for educational purposes only. There is risk associated with all investments, both traditional and alternative investments. Not all investments are for all investors, and appropriate portfolio planning, whether traditional or alternative is required prior to making any investments. Classification of risk for an investment is based on many factors, some of which is inherent in the investment and some of it is based on the portfolio and plan of the investor. Please seek professional advice prior to planning any investment whether traditional or alternative. Nothing in this article implies, either explicitly or implicitly, that NUA or the authors of this article is soliciting investors for any specific type of investment, nor is NUA or the authors providing any form of investment advice through this article. Not all information contained within this article may be applicable to all readers, and NUA shall not be held responsible or liable for any use of the information with or without seeking knowledgeable professional advice.